Brad Kinkelaar, whose mutual fund ranks among the top 15 percent in the United States this year, is depending on dividends from shipping port operators in China to help propel his investment returns.
Kinkelaar's Thornburg Investment Income Builder Fund bought shares of China Merchants Holdings International Co. in September and Shenzhen Chiwan Wharf Holdings Ltd. in June because China's ports last year handled more cargo containers than those in the United States for the first time. Hopewell Highway Infrastructure Ltd., the owner of one of the busiest toll roads in southern China, is the third recent addition to Kinkelaar's fund, which holds 44 stocks.
China Merchants and Shenzhen Chiwan Wharf have dividend yields that double the 1.7 percent average for companies in the Standard & Poor's 500-stock index.
"We can go almost anywhere around the world and find higher yields than in the U.S.," Kinkelaar, 36, said in a telephone interview. He has overseen the fund with Steve Bohlin and Brian McMahon at Thornburg Investment Management in Santa Fe, N.M., since it opened at the end of 2002.
The $412 million Thornburg Investment Income Builder Fund is up 5.5 percent this year, compared with the 1.3 percent gain of the S&P 500 and the 3 percent advance of the average U.S. equity fund. The best-performing growth and income fund tracked by Bloomberg is the $80 million Philadelphia Fund, up 15 percent.
"There's an inherent conservatism in these funds," said Bill Rocco, an analyst at the mutual-fund research firm Morningstar Inc. in Ashland, Ore. "Sometimes dividend-paying stocks aren't the most exciting growth opportunity."
China's central bank jolted global financial markets by raising its benchmark interest rates for the first time in nine years to cool the world's fastest-growing major economy. Kinkelaar said he doesn't expect Chinese stocks to tumble as a result.
"A slowdown in the economic development was part of our expectations, but we still think there's compelling value there," Kinkelaar said.
China Merchants and Shenzhen Chiwan Wharf operate in Shenzhen, a coastal city that abuts Hong Kong. Ports in Chinese cities handled 48 million 20-foot cargo containers last year, up 30 percent from 2002. Shenzhen ranked last year as the world's fourth-largest container port after Hong Kong, Singapore and Shanghai, according to data from the Hong Kong government.
"It's at the mouth of the Pearl River and much of the outsourcing begins there," Kinkelaar said.
While emerging-market investments tend to be riskier, the companies' earnings prospects -- and their ability to increase dividend payments -- are better than those of some established U.S. companies, Kinkelaar said.
Shares of China Merchants have risen 11 percent this year, including reinvested dividends. Shenzhen Chiwan Wharf's stock is up 40 percent.
China Merchants' first-half profit climbed 34 percent to $107 million from a year earlier, and the company expects profit to rise next year as it plans to build 12 berths.
Hong Kong-based Hopewell Highway has gained from demand for improved infrastructure in the region. The firm plans to widen a toll road in southern China, a project that will cost about $846 million, to cope with rising traffic, Chairman Gordon Wu said Oct. 18 after a meeting with investors.
Shares of Hopewell Highway are up 11 percent this year, including reinvested dividends. The company plans to pay a full-year dividend of 30 Hong Kong cents a share, up from 18 cents a year earlier.
"There are ships that are sitting idle, waiting to be docked at the port," Kinkelaar said. "Instead of sitting there, they have trucking companies that are driving up the river on less-than-adequate roads."
Kinkelaar has 6 percent of the fund's assets in real estate investment trusts and utility stocks. While REITs and utilities have long been considered reliable dividend generators, he views them as too expensive.
"Real estate and utilities are selling at some of the highest valuations that we've seen in a long time," he said.
Kinkelaar, who holds a master's of business administration from Northwestern University in Evanston, Ill., began his career working in the marketing department of the St. Louis Cardinals baseball team. He joined Thornburg Investment in 1999. The firm oversees about $10.8 billion for clients.
Investors are looking to dividend-paying stocks for dependable income after the three-year bear market ended March 2003 with the S&P 500 falling 41 percent, Kinkelaar said.
"A lot of the money was reinvested unprofitably during the period," he said. The Dow Jones Select Dividend Index, which measures 50 stocks with above-average dividend payouts, is up 9.2 percent this year.
More companies are paying dividends following President Bush's 2003 law that cut the top tax rate on dividends, according to a recent study by the University of Illinois in Urbana-Champaign. The number of U.S. companies paying a dividend has risen to 20 percent from 15 percent in 2001, the study found. The report excludes utilities and financial services companies.
"People are looking at dividends as a way to restore confidence," said David Ikenberry, chairman of the university's finance department and a coauthor of the study. "While earnings are pliable, dividends are not."
Dividends have become more common in China since the Asian financial crisis of the late 1990s, said Seton Lor, executive director of equities at Manulife Asset Management Ltd. in Hong Kong.
"Companies have woken up to the fact that if they want foreign capital, they need to ensure that they don't milk investors," Lor said in an interview. "One of the ways to do that is to increase the dividend payout."
He cited a study by Robert Arnott, manager of the $3.3 billion Pimco All Asset Fund, and Clifford Asness, managing principal at AQR Capital Management LLC. They examined the dividends and earnings of companies that make up the S&P 500 from 1950 to 2001. They found that those with the highest dividend-payout ratios generated more profit growth than those with the lowest ratios.
"When you have less capital to play with, you make better decisions," Kinkelaar said.